Modeling Interstate Banking in the United States: the Spatial 3-Stage Least Squares Approach

Abstract

This study uses a spatial 3-stage least squares approach to model interstate banking of the United States in 1994 and 2014. The method simultaneously takes into account spatial dependence, outward and inward interstate banking and their interaction, and the temporal effects in interstate banking. The study shows that a healthy economic structure, an expanding market, and permissive banking legislation encourage inward interstate banking. A healthy economic structure is a basis for strong banking firms to rise and to expand in other states. Large banking institutions were dominate in outward interstate banking while smaller firm sizes tend to be associated with inward interstate banking. By 2014, large and well-capitalized banking firms from states with a healthy economic structure had expanded into states with lower income levels, and lower capital-to-labor ratios, higher labor resource use, and lower profitability in their banking industry. Evidence shows some banking geographical fragmentation remains.